Introduction to

Supply Chain Management

David Simchi-Levi

Professor of Engineering Systems

Massachusetts Institute of Technology

Customers demand
centers sinks
Sources:
Plants vendors
ports

Regional warehouses:
Stocking points

Field warehouses:
Stocking points

Supply

Inventory & warehousing

costs
Production/purchase
costs

Transportation costs

Transportation costs

Inventory & warehousing

costs
Image by MIT OpenCourseWare.

Supply Chain Management

Definition:
Supply Chain Management is primarily concerned
with the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is
produced and distributed in the right quantities, to
the right locations and at the right time, and so as to
minimize total system cost subject to satisfying

service requirements.
requirements

Notice:
Who is involved
Cost and Service Level
It is all about integration
Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the Supply

Chain
1 Purchasing
1.
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing
Long run production
High quality
High productivity
Low production cost
Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the Supply

Chain
3 Warehousing
3.
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices
Copyright 2003 D. Simchi-Levi

Order Size

The Dynamics of the Supply Chain

Customer
Demand

Distributor Orders

Retailer Orders

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Copyright 2003 D. Simchi-Levi

Order Size

The Dynamics of the Supply Chain

Customer
Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Copyright 2003 D. Simchi-Levi

Todays Supply Chain Challenges

Global supply chain with long lead times

Rising and shifting customer expectations
Increase in labor costs in developing countries
Increase in logistics costs

Increase in Logistics Costs

US Logistics Costs as Percent of GDP
14

13

12

15% increase
11

10

8
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Rising energy prices

Rail capacity pressure
Truck driver shortage
Security requirements

Total US Logistics Costs 1984 to 2007 ($ Billions)

Total US Logistics Costs in $MMs

Total Cost

1600

1400

52%

1200

1000

47%

800

Transportation
600

Inventory

62%

400

200

Admin

0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Inv Carrying

Transportation

Admin

Total

Source: 19th Annual Logistics Report

10

Todays Supply Chain Challenges

Global supply chain with long lead times

Rising and shifting customer expectations
Increase in labor costs in developing countries
Increase in logistics costs
Importance of sustainability
Unprecedented Volatility

11

Unprecedented Volatility

Number of days the price

of oil changed 5% or more

1990: 38 days
2008: 39 days

Year

In 2008 the price of oil changed 5% or more from its previous close
on 39 days making it the most volatile year since 1990.
Source: NYT

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Supply Chain: The Magnitude

It iis esti
timated
t d tth
hatt the
th grocery ind
dustry
t could
ld
save $30 billion (10% of operating cost) by
using effective logistics strategies.
A typical box of cereal spends 104 days getting
from factory to supermarket.
A typical
t i l new car spends
d 15 days
d
traveling
t
li from
f
the factory to the dealership.

Copyright 2003 D. Simchi-Levi

Supply Chain: The Magnitude

(continued)
Compaq computer estimates it lost $500 million to $1
billion in sales in 1995 because its laptops and desktops
were not available when and where customers were
ready to buy them.
Boeing Aircraft, one of Americas leading capital goods
producers, was forced to announce writedowns of $2.6
billi iin O
billion
October
t b 1997
1997.

The reason? Raw material shortages, internal and

supplier parts shortages. (Wall Street Journal, Oct.

23, 1997)

Copyright 2003 D. Simchi-Levi

Supply Chain: The Potential

Procter & Gamble estimates that it saved retail
customers $65 million through logistics gains over the
past 18 months.
According to P&G, the essence of its approach lies in
manufacturers and suppliers working closely together
. jointly creating business plans to eliminate the
source of wasteful practices across the entire supply
chain.
(Journal of Business Strategy, Oct./Nov. 1997)
Copyright 2003 D. Simchi-Levi

Supply Chain: The Potential

Dell Computer has outperformed the competition
in terms of shareholder value growth over the
eight years period, 1988-1996, by over 3,000%
(see Anderson and Lee, 1999) using
- Direct business model
- Build-to-order strategy.

Copyright 2003 D. Simchi-Levi

Supply Chain: The Potential

In 10 years,, Wal-Mart transformed itself
by changing its logistics system. It has
the highest sales per square foot,
inventory turnover and operating profit
of any discount retailer.

Copyright 2003 D. Simchi-Levi

Supply Chain: The Complexity

National Semiconductors:

Production:
Produces chips in six different locations: four in the US,
one in Britain and one in Israel
Chips are shipped to seven assembly locations in
Southeast Asia.
Distribution
The final product is shipped to hundreds of facilities all
over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.
Copyright 2003 D. Simchi-Levi

Supply Chain Challenges

Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time

Copyright 2003 D. Simchi-Levi

Sequential Optimization
Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Global Optimization
Supply Contracts / Collaboration / Information Systems and DSS

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Image by MIT OpenCourseWare.

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Supply Chain Challenges

Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time

Managing Uncertainty
Matching Supply and Demand
Demand is not the only source of
uncertainty
Copyright 2003 D. Simchi-Levi

Develop
pment Supp
ply Chain

The Enterprise
Fulfillment and Development Supply Chains

Plan/Design

Supply

Product Architecture
Make/Buy
Make/Buy
Early Supplier Involvement

Source

Strategic Partnerships
Suppliers Selection
Supply Contracts

Produce

Distribute

Sell

Fulfillment Supply Chain

11

Fulfillment and Development Supply Chain

Industry clock speed

Innovative vs. functional

products

Core competencies

Product design

Make vs. buy

Modular vs. integral

Development Supply Chain

Plan/Design

Source

Supply

Produce

Product architecture
Make/buy
Early supplier involvement
Strategic partnerships
Supplier selection
Supply contracts

Distribute

Sell

Fulfillment Supply Chain

Uncertainty and variability

Lead time

Economies of scale

Demand and supply

Offshoring vs. onshoring
Production and transportation

Whats New in Logistics?

Global competition
Shorter product life cycle
New, low-cost distribution channels
More powerful well-informed customers
Internet and E-Business strategies
Copyright 2003 D. Simchi-Levi

12

Significant Increase in Outsourcing

Purchasing as % of Sales
70%

60%
60%
57%

54%

50%
40%
34%
30%

28%
24%

22%

20%
16%

Machinary
Computer and telecom
Food manufacturing
Telecom services

10%
0%
1993

1996

Copyright 2003 D. Simchi-Levi

New Concepts
Push-Pull
Push Pull strategies
Direct-to-Consumer
Strategic alliances
Manufacturing
g postp
p ponement
Dynamic Pricing
E-Procurement
Copyright 2003 D. Simchi-Levi

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Copyright 2003 D. Simchi-Levi

14

MIT OpenCourseWare
http://ocw.mit.edu

ESD.273J / 1.270J Logistics and Supply Chain Management

Fall 2009

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